Business context and reporting period
The Bank of New York Mellon Corporation (BNY Mellon) filed this unaudited Form 10-Q for the quarter ended March 31, 2014. The global investments company operates primarily through Investment Management and Investment Services. At quarter-end, assets under custody and/or administration (AUC/A) were $27.9 trillion and assets under management (AUM) were $1.62 trillion.
Financial performance and position
| Metric | Q1 2014 | Comparable period |
|---|---|---|
| Revenue | $3.647 billion | $3.629 billion in Q1 2013; $3.611 billion in Q4 2013 |
| Net income applicable to common shareholders; diluted EPS | $661 million; $0.57 | Q1 2013: loss of $266 million; $(0.23). Q4 2013: $513 million; $0.44 |
| Net interest revenue; FTE net interest margin | $728 million; 1.05% | Q1 2013: $719 million; 1.11%. Q4 2013: $761 million; 1.09% |
| Noninterest expense | $2.739 billion | $2.828 billion in Q1 2013; $2.877 billion in Q4 2013 |
| Provision for credit losses | Credit of $18 million | Credit of $24 million in Q1 2013; provision of $6 million in Q4 2013 |
| Operating cash flow | Use of $1.055 billion | Use of $2.744 billion in Q1 2013 |
| Total assets; deposits | $368.2 billion; $252.2 billion | December 31, 2013: $374.5 billion; $261.1 billion |
| Available funds | $143.7 billion | $155.3 billion at December 31, 2013 |
| Long-term debt | $20.6 billion | $19.9 billion at December 31, 2013 |
| Fully phased-in estimated CET1 ratio | 11.1% Standardized Approach; 10.7% Advanced Approach | December 31, 2013: 10.6%; 11.3%, respectively |
Q1 common shareholders’ net income was $661 million versus a prior-year loss that included an $854 million charge related to the U.S. Tax Court’s disallowance of certain foreign tax credits. Excluding that charge, Q1 2013 common net income was $588 million ($0.50 per diluted share). Revenue rose about 1% year over year; lower expenses and improved credit quality also supported results. The reported Q1 2014 effective tax rate was 25.1%.
Material changes and business trends
- Investment services fees increased 3% year over year to $1.699 billion, primarily on higher market values, net new business and organic growth. Investment management and performance fees rose 3% to $843 million, despite increased money-market fee waivers.
- AUM increased 14% year over year, reflecting market gains and net new business; long-term net inflows were $21 billion. AUC/A increased 6%, primarily from higher market values.
- Foreign exchange and other trading revenue fell 16% year over year to $136 million, mainly due to lower volatility and weaker fixed-income trading revenue.
- Net interest revenue increased 1% year over year, but the FTE margin declined six basis points to 1.05%, primarily reflecting lower investment-securities yields.
- Noninterest expense declined 3% year over year. The comparison benefited from prior-year costs for administrative errors in certain offshore tax-exempt funds and for generating certain tax credits.
- At quarter-end, the portfolio’s net unrealized pretax securities gain was $676 million, up from $309 million at December 31, 2013, principally due to lower market interest rates.
Outlook, risks, contingencies and notable events
- Management expected a second-quarter 2014 effective tax rate of approximately 27% and a credit-loss provision of $0–$15 million.
- The company estimated that continued runoff of high-margin structured debt securitizations could reduce annual revenue by up to 0.5% if those markets do not recover. Management also noted that a 100-point change in the S&P 500, spread evenly through a year, was estimated to affect diluted EPS by $0.02–$0.04.
- The Federal Reserve did not object to the 2014 capital plan. The board authorized up to $1.74 billion in common-stock repurchases through Q1 2015 and raised the quarterly dividend 13%, from $0.15 to $0.17 per share. Q1 repurchases totaled $375 million; an additional $308 million was repurchased from April 1 through May 8.
- BNY Mellon agreed on March 31 to sell its Wing Hang Bank investment, with a fair value of $1.0 billion and book value of $544 million; closing was expected in Q3 2014. On May 1, it acquired the remaining 65% of HedgeMark International.
- The company reported approximately $550 million of Russia exposure and no material Ukraine exposure. It warned that further sanctions could adversely affect related businesses and results.
- Management disclosed a potential additional exposure of approximately $100 million related to administrative errors involving offshore tax-exempt funds. It also reported that reasonably possible losses across certain legal matters could total up to $745 million above related accruals, where estimable; for some matters, it could not estimate a loss range. The Sentinel litigation and foreign-exchange standing-instruction matters remain among the significant proceedings.
- Other risks include litigation and regulatory costs, interest-rate and deposit behavior uncertainty, market volatility, credit and counterparty risk, and evolving capital, liquidity and other regulations. Management stated that liquidity stress tests indicated sufficient resources and that disclosure controls were effective.
- The company early adopted ASU 2014-01 on affordable-housing investments and retrospectively restated prior periods. The filing states that the change did not alter prior-period EPS.
Important facts for investors to verify
- Reconcile reported earnings with the unusual prior-year foreign-tax-credit charge and assess the status and potential outcome of the appeal.
- Track fee growth, money-market fee waivers, market-sensitive AUM/AUC/A, structured-debt runoff and trading revenue.
- Assess the quality and concentration of credit exposures, including overdrafts, residential mortgages, Russia exposure, Sentinel and the $0–$15 million Q2 provision outlook.
- Monitor liquidity and deposit trends, debt maturities, capital ratios under both Basel III approaches, and execution of the repurchase and dividend plans.
- Review developments in the offshore-fund administrative-error exposure, the disclosed legal-loss range, foreign-exchange litigation and regulatory requirements.
- Confirm the Wing Hang sale’s completion and proceeds, and the integration and financial impact of the HedgeMark acquisition.